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SMSF Life Insurance: What Trustees Need to Know
Written by Safety Nest
The short answer
Yes, a self-managed super fund can hold life insurance for its members. If you're a trustee (or a director of the trustee company), you also have to consider insurance for each member, even if the fund ends up holding none. That's a real difference from a big fund, which usually sets up insurance for you. In an SMSF, the trustees arrange it or decide not to, and there are three catches worth knowing before you do either.
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SMSF Life Insurance Explained: 3 Catches for Trustees
Read the transcript
Can your SMSF hold life insurance? Yes, it can. And if you're a trustee, you have to consider insurance for each member.
The fund doesn't have to hold it. But your written investment strategy needs to show you considered it. Most super funds offer insurance to their members.
An SMSF doesn't do that for you. And there are three catches worth knowing. Meet Nick, our example.
He's a builder who set up an SMSF and rolled his old super across. Here's the first catch. Moving to an SMSF may mean losing the insurance you had with your old fund.
Nick's old fund gave him life insurance and TPD. When he closed that account, that insurance may have ended with it. And new insurance usually means health questions.
So if his health has changed, he may not get the same insurance again. The second catch: there are limits on what insurance an SMSF can hold. Since July 2014, it has to match one of a few conditions of release, the rules for when super can be paid out.
That means life insurance, including for a terminal medical condition, and insurance for permanent or temporary incapacity. TPD and income protection may fit, but only on terms that match. Own occupation TPD, for example, generally doesn't.
And trauma insurance generally doesn't fit. The ATO says SMSFs generally can't provide it for their members. The third catch is where the money goes.
If Nick makes a claim, the insurer pays the SMSF, not Nick. The money becomes part of the fund, at least until Nick meets a condition of release. And the premiums come out of the fund, which reduces his retirement savings.
Insurance can be held inside an SMSF, or personally, outside super. Each way has trade-offs. In an SMSF, the trustees make the decisions a big fund would usually make for you.
So is Nick insured? If his old insurance ended and nothing new was arranged, he may not be. If new insurance was arranged, inside the fund or outside it, he may be.
Think about yours. Check what your investment strategy says about insurance, and when you last reviewed it. Not sure what yours says?
We can go through it with you. We're Safety Nest. Five stars on Google, and we've helped hundreds of Australians with their life insurance.
We advise across major Australian insurers. Booking takes a few clicks. Pick a day, then a time, add your details, and it's confirmed.
It's a no-obligation consultation, and there's no fee for this meeting. If you take out a policy, the insurer pays us a commission, and you pay the premiums. Book a time at safetynest.
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What the rules say trustees must do
The fund doesn't have to hold insurance. But your written investment strategy needs to show you considered it. The SIS Regulations require the strategy to have regard to whether the trustees should hold insurance for one or more members, and the ATO says to review the strategy at least once a year and document that review.
Most large super funds offer insurance to their members, often automatically. An SMSF doesn't do that for you. If nobody arranges it, nothing is in place.
An example: Nick
Nick is our example, not a real client. He's a builder who set up an SMSF and rolled his old super across. Each catch below is something Nick could run into.
Catch one: you may lose the insurance you had
ASIC's Moneysmart says moving to an SMSF may mean losing insurance you had with another super fund.
Nick's old fund gave him life insurance and TPD. When he closed that account, that insurance may have ended with it.
New insurance usually means answering health questions again. So if Nick's health has changed since he was first insured, he may not get the same terms, or the same insurance, a second time. Moneysmart's advice is simple: check your insurance before changing super funds or closing an account.
Catch two: there are limits on what an SMSF can hold
Since 1 July 2014, insurance held in super has to line up with one of a few conditions of release, the rules for when super can be paid out. That leaves:
- life insurance, including for a terminal medical condition that meets a condition of release
- insurance for permanent incapacity
- insurance for temporary incapacity
TPD and income protection can fit, but only on terms that match those conditions. Own occupation TPD, for example, generally doesn't. Our guide to own occupation vs any occupation TPD explains why that difference matters at claim time.
Trauma insurance generally doesn't fit either. The ATO says SMSFs generally can't provide it for their members.
Members who joined a fund and had the insurance in place before 1 July 2014 may be treated differently, and these rules apply to all regulated super funds, not just SMSFs.
Catch three: where the money goes
If Nick makes a claim, the insurer pays the SMSF, not Nick.
The ATO says the money becomes part of the fund's assets, at least until Nick meets a condition of release. And the premiums come out of the fund too, which reduces his retirement savings over time.
Inside the SMSF, or outside super?
Insurance can be held inside an SMSF, or personally, outside super. Each way has trade-offs, and neither is right for everyone. We walk through the general pros and cons in life insurance and superannuation.
What changes with an SMSF is who decides. The trustees make the decisions a big fund would usually make for you, including how much insurance each member holds and whether it still fits.
So is Nick insured?
It depends. If his old insurance ended and nothing new was arranged, he may not be. If new insurance was arranged, inside the fund or outside it, he may be.
Check yours
Open your SMSF's investment strategy and look for two things:
- what it says about insurance for each member
- when you last reviewed it
If you rolled over from another fund, also check whether the insurance you held there is still in place.
FAQs
Frequently asked questions
Does an SMSF have to hold life insurance?
No. But the trustees must consider insurance for each member as part of the fund's investment strategy, and the strategy should show that consideration and be reviewed regularly.
Can an SMSF hold trauma insurance?
Generally not. The ATO says SMSFs generally can't provide trauma insurance for their members, because it doesn't line up with a condition of release. Members who joined a fund and had the insurance in place before 1 July 2014 may be treated differently.
Can an SMSF hold own occupation TPD?
Generally not on new policies. Insurance in super has to match a condition of release, and own occupation TPD generally doesn't. Any occupation style TPD can fit.
Who gets paid if an SMSF insurance claim succeeds?
The insurer pays the fund. The money becomes a fund asset, and it can only be paid out to the member once a condition of release is met.
Will I lose my old fund's insurance if I move to an SMSF?
You may. Closing your old super account can end the insurance attached to it, so it's worth checking before you roll over.
Protect your future
Protect your family's financial future
Ready to check your SMSF's insurance? Not sure what your fund's strategy says? Your specialist can go through it with you. It's a no-obligation consultation, and there's no fee for this meeting. If you take out a policy, the insurer pays us a commission, and you pay the premiums. Click Get Started to book a time.